Regulatory Update February 2024

In this issue we cover:

• Navigating Sustainable Investment Products
• Market Watch Revisited
• Reducing and Preventing Financial Crime
• Tackling Trading Linked Organised Crime
• Asset Management Firms External Risk Environment

Navigating Sustainable Investment Products
The FCA has implemented new rules and guidance aimed at enhancing transparency and preventing greenwashing in the sustainable investment market. These measures include:

• An anti-greenwashing rule for all FCA authorised firms making sustainability claims, ensuring these claims are accurate and not misleading.
• Specific regulations for UK asset managers, including investment labels and rules on disclosure, naming, and marketing.
• Rules targeting distributors of investment products to retail investors in the UK, to improve information clarity for consumers.

Key points for firms to act on include preparing for the anti-greenwashing rule, familiarising with the new regime’s requirements and making necessary adjustments to comply with labeling, marketing, and disclosure obligations. This initiative is detailed in the FCA’s Policy Statement on Sustainability Disclosure Requirements and investment labels (PS23/16).

Firms are advised to review these guidelines carefully and take proactive steps to align with the regulations before they come into effect, ensuring transparent and fair communication with consumers regarding sustainable investment products.

Market Watch Revisited
Market Watch 76 revisits misleading market practices. Drawing information from Market Watch 57, the FCA highlighted concerns about “flying” and “printing” activities—misleading market practices involving false claims about bids, offers, or trades that can distort market perception of a financial instrument’s liquidity or price. These practices not only mislead clients and market participants, potentially causing financial harm, but also threaten market integrity and could violate UK Market Abuse Regulation and Financial Services Act provisions.

Despite previous warnings, instances of flying and printing persist across various markets, including fixed income and commodities, often involving manipulative strategies like entering misleading prices to influence market orders. Additionally, some firms have shown inadequate responses to these behaviours, lacking proper risk recognition, surveillance, and timely action against misconduct.

Firms are urged to combat these risks by:

• Explicitly prohibiting flying and printing in compliance manuals and securing annual compliance attestations.
• Delivering targeted training that covers the nature, prohibition, and consequences of such practices, especially to higher-risk desks.
• Implementing and ensuring the effectiveness of surveillance systems to detect and report these activities, incorporating specific metrics like spread compression and order cancellation rates.

Establishing clear disciplinary procedures that prioritise integrity over commercial interests.

Therefore it is emphasised the importance of adherence to legal standards and acting decisively against practices that can compromise the fairness and confidence in UK markets.

Reducing and Preventing Financial Crime
The FCA released an update on its ongoing efforts to diminish and prevent financial crime, marking the halfway point of its three year strategy initiated in 2022. The FCA highlights the significant progress made in the past 18 months in combating fraud, money laundering, and sanctions evasion.

Looking ahead, the FCA has identified 4 critical areas for continued focus and partnership:

• Data and Technology: The FCA emphasises the necessity for firms to implement systems and controls that can adapt to the growing complexity and threat of cyber fraud, cyber attacks, and identity theft.
• Collaboration: There is a push for firms and external partners to enhance data and intelligence sharing, leveraging new technologies for more effective data exchange.
• Consumer Awareness: The FCA points out the importance of increasing consumer awareness to protect against direct targeting by fraudsters.
• Metrics: Firms are expected to develop and use specific outcomes and metrics to gauge the success of their financial crime prevention efforts.

The FCA also offers case studies and poses questions for firm boards to ponder, aiming to assist in the reduction of fraud and money laundering rates. Concurrently, the FCA is set to aid in advancing the Government’s plans to overhaul the AML supervisory framework.

Tackling Trading Linked Organised Crime
The FCA’s latest report, Market Watch 77, focuses on the significant threat organised crime groups (OCGs) pose to market integrity through suspicious trading activities. These groups exploit insider information, particularly around merger and acquisition announcements, to manipulate market prices for UK and internationally listed equities. Beware of:

• OCG Definition: As per the Serious Crime Act 2015, OCGs are groups with the intent of criminal activity, involving three or more individuals.
• Insider Dealing: A criminal offense under the Criminal Justice Act 1993, often perpetrated by OCGs through advanced knowledge of corporate events.
• OCG Tactics: Recruitment of insiders, use of intermediaries, and operation through less regulated umbrella accounts to mask identities and manipulate markets.
• Firm Vigilance: The FCA urges firms to be alert to signs of OCG activity, such as unusual trading patterns or suspicious client behaviour around M&A announcements.

Firm Responsibilities:

• Executing Firms: Should adopt a zero-tolerance policy towards market abuse, enhance surveillance, and report suspicious activities promptly.
• Advisory Firms: Need to protect sensitive information and educate staff on the risks of being approached by OCGs.

The FCA’s Stance: The FCA will utilise a range of enforcement tools to ensure compliance and maintain market integrity, highlighting the importance of firm cooperation in identifying and reporting suspicious activities.

Asset Management Firms External Risk Environment
The FCA updated its strategy in a Dear CEO letter for investment and alternative asset firms, building on its previous 2022 and 2023 communications. Asset managers experienced uncertainty and several market shocks in 2023, resulting in challenges in raising and maintaining assets. The FCA’s focus for the coming year includes:

• Raising Standards: Emphasising strong governance, especially in volatile markets, and adherence to consumer duty, sustainability disclosures, accurate investment valuations, and operational resilience.
• Preventing Harm: Ensuring firms have controls to maintain market stability and prevent financial crimes.
• Encouraging New Ideas: Supporting digital innovations like fund tokenisation, in collaboration with the Treasury’s Asset Management Taskforce and international regulators, to integrate new technologies safely and effectively.
• Fostering Competition and Improvement: Updating regulations, streamlining fund approvals, facilitating international operations, and working towards global standards.

The FCA urges firm leaders to align their strategies with these priorities to address potential risks and improve consumer outcomes.